The 'hands' of Deeming Fiction
FEBRUARY 23, 2015
By Narendra Pati, Khaitan & Co.
DEEMING fictions are used in various documents, statutory as well as private documents, to carry out a specific objective as intended by the author of the document. We are restricting our discussion to statutory documents but this is equally applicable to any document. A deeming fiction cannot be a pure and unbridled fiction but can only be a fact,which is spelt out in proper perspective, to achieve a certain stated objective. But for this deeming provision, the author doubts that reader will not give the main document an intended effect. Sometimes it is debated as to whether the deeming fiction is creating a legal fiction or whether it is creating a presumption of fact. But is it basically a ‘creation'? Creation of legal fiction will not be correct position as the author will not intend to create something new away from the contents of his own document and the deeming fiction has to have a coherent link with the main document itself. Each perspective on the purpose of the deeming statement may give rise to a different interpretation of the effect of the deeming statement in question and thus lead to divergent arguments as to different consequences.
Hence while analysing such deeming provisions one needs to understand the Author, Intended objective, stated objective and most importantly the void that would have got created in its absence. This analysis will then define the four corners within which the deeming fiction will apply, may be it is in terms of time, geography, product, law etc. Deeming fictions are used in statutory provisions for various purposes like (i) creating a legal fiction, where it treats two transactions equally when the two are different in legal substance but are analogous in economic effect (eg. deemed dividend, deemed export) (ii) Declaring a law or clarifying meaning of a term (eg. Statement served will be deemed show cause notice u/s 73(1A) of Service Tax Provisions) (iii) presuming that accepts something as fact without the benefit of evidence (eg.Deeming place of provision under Service Tax).
Deeming fiction, being fact restated, it has to be limited (rarely extended) by the thought of the Author and its intendment. Sometimes, reader of a document misses out on this aspect of limitation and even if he knows the limitation, he fails to ascertain the exact limitation which creates confusion, requiring expert guidance.
It is an accepted fact that legislature is competent to create a legal fiction, for the purpose of assuming existence of a fact which does not really exist. It is also a well-settled law that full effect has to be given to a piece of legal fiction. However, in doing so one must be guided by the purpose for which fiction has been created and after ascertaining this, the Court is to assume all those facts and consequences which are incidental or inevitable corollaries for giving effect to that fiction - But in so construing the fiction it is not to be extended beyond the purpose for which it is created. Apex Court in the case of M/s. Bengal Immunity Co. Ltd. v. State of Bihar - 1955 (2) S.C.R. (603) P. 650 = AIR 1955 S.C. (661) P. 681 has held that legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field.
James Lords Justice in Ex-parte, Walton, In re, Levy(1881) 17 Chance. D. 746 speaks on deeming fiction as:“When a statute enacts that something shall be deemed to have been done, which in fact and in truth was not done,the Court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to”.
In Szoma v. Secretary of State for the Department of Work and Pensions (2006) 1 All E.R. 1 (at 25) , Court held: “it would be quite wrong to carry this fiction beyond its originally intended purpose so as to deem a person in fact lawfully here not to be here at all. The intention of a deeming provision, in laying down a hypothesis is that the hypothesis shall be carried so far as necessary to achieve the legislative purpose but no further”
When a thing is to be ‘deemed' something else, it is to be treated as that something else with the attendant consequences, but it is not that something else. (per Cave J., R. v. Norfolk County Court, 60 L.J.Q.B. 380 ).
In Hill v. East and West India Dock Co. (1884 (9) AC 448 (H.L.), State of Travancore Cochin and Ors. V ,it was held that "when a statute enacts that something shall be deemed to have been done, which in fact and in truth was not done, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to. After ascertaining the purpose full effect must be given to the statutory fiction and it should be carried to its logical conclusion and to that end it would be proper and even necessary to assume all those facts on which alone the fiction can operate.
The intention of a deeming provision, in laying down a hypothesis is that the hypothesis shall be carried so far as necessary to achieve the legislative purpose but no further. ( Ref DEG Deutsche Institutions and another v. Kosby (2001) 3 All E.R. 878 .)
When we analyse Court decisions on specific provisions of different Acts, they only propagate the above principle in the way of identifying the limitation in the given situation of the impugned cases.
We quote here below two such Court decisions one in Central Excise and another in Income Tax as illustrations.
AURO TEXTILE Versus COMMISSIONER OF C. EX., CHANDIGARH: Fabrics - Processed cotton fabrics - Exemption - Explanation-II to Notification No. 14/2002-C.E. that even without evidence of duty payment, assessee is entitled to claim benefit of notification - HELD : It creates legal fiction/deeming provision/presumption of existence of documentary proof of payment of duty but does not relate to payment of duty itself - It cannot be interpreted to mean that even where product is subjected to nil rate of duty, payment of duty is to be presumed - Though it absolves assessee from their primary obligation of proof of payment of duty, legal fiction created by it is exclusively for purpose of conditions to the Notification ibid which speak of actual payment -Therefore, existence of facts which could be presumed to give full effect to deeming provision would be in relation to actual payment of duty as contemplated under condition, and not of those facts which are neither incidental nor inevitable to payment of duty - It does not enlarge scope of the conditions and cannot be extended beyond its own scope to fact of actual payment itself as it will amount to virtually its rewriting - To presume payment of duty even in a case of no such payment having been made, would amount to creation of another fiction which is not contemplated under the said explanation - If department was able to show that assessee has not paid any duty on products specified in the conditions, then claim for benefit under the notification could be denied - Explanatory note to 2002 Budget did not merely refer to entitlement to benefit of Notification ibid, without producing documentary evidence of payment of duty, but also referred to compliance of condition of payment of duty, hence could be of no help to assessee.
(Kanbay Software vs. DCIT (ITAT - Pune) 2009-TIOL-278-ITAT-PUNE: Explanation 1 1 to s. 271 (1) (c) creates a legal fiction and raises a presumption against the ‘A”. It provides that if in respect of any fact which is material to the computation of total income, ‘A' (i) does not offer an explanation or offers an explanation which is found to be false by AO, OR (ii) offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all material facts have been disclosed then, the amount added or disallowed shall be deemed to be income in respect of which particulars are concealed. It is pertinent to note that this Explanation is restricted to a case where ‘A' is unable to offer an explanation or is unable to substantiate the explanation offered by him in respect of factual detail of the income. Therefore, even this Explanation does not and cannot apply to a case where addition/disallowance has been made by mere rejection of legal claim made by AO.
Hence it is for sure that there is a limitation to any deeming fiction. But a Court charged with the task of enforcing the statute needs to decide the intendment of the legislature through the specific statute for ascertaining (not assigning) any limitation to these deeming provisions.
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